Pros and Cons of a term deposit

Thinking about putting your money in a term deposit? While these accounts can offer stability through fixed rate, they also come with certain limitations. It’s a good idea to get a well-rounded picture of term deposits. By looking at both the pros and cons, you can get an idea if a term deposit will work for you or not. 

To help you decide, we’ve compiled a list of pros and cons so you can get a good idea of whether they work for you.

What are term deposits?

A term deposit is a way of saving where you agree to lock away your money for a specific period in exchange for a guaranteed interest rate. Terms can range from a few months to several years, with longer terms generally offering higher interest rates.

Term deposits come with a couple of key advantages. Some of the things that can make term deposits ideal for you are:

• Interest rate certainty. Once you lock in your rate, you know exactly how much your savings will grow, regardless of market fluctuations.
• It’s low maintenance. After you've made your initial deposit, there's nothing else you need to do until the term ends. This "set and forget" nature can be appealing if you prefer a hands-off approach to saving.
• No service or startup fees. One of the best things about a term deposit is that as long as you don’t withdraw early, it’s entirely fee-free.
• Protected from slumps in the market. Since term deposits have a fixed interest rate, even if market interest rates are in free fall, your savings will keep earning the same level of interest.
• Impulse spending control. Are you a bit of an impulse spender? Once your money is in a term deposit, hefty penalties apply for taking it out early, so it can actually help curb bad spending habits.

While fixed interest rates and inaccessibility can lead to some advantages with term deposits, they also come with a few downsides. Some of these include:

• Your money isn’t accessible. Once your money is in a term deposit, it's generally inaccessible until the term ends. Early withdrawals often incur penalties and reduced interest rates.
• No extra deposits. You can't add to your deposit once it's set up, which means you miss out on the opportunity to grow your savings further during the term.
• Less flexibility. A term deposit is low risk – but the flip side is that it’s not a very flexible savings option. Other products with comparable rates, such as high interest savings accounts, offer much more in terms of flexible features and options.
• No bonus interest. Some savings accounts have introductory or bonus interest rates that allow you to earn a higher rate based on the conditions set. Term deposits generally don’t have this. (However, some do offer loyalty bonuses)
• Rollover terms are often less competitive. If you forget to make plans for your money after your term deposit matures, it could roll over into another term at a lower interest rate than average.
• Won’t benefit from rises in the market. If interest rates rise significantly during your term, you're locked into your lower rate and can't take advantage of better offers without incurring penalties.

Term deposits are generally considered a low-risk way to save money. You get a guaranteed interest rate for your chosen term, providing certainty of returns. Additionally, the Australian government guarantees deposits of up to $250,000 per person, per Authorised Deposit-taking Institution (ADI). This means that even if your bank faces financial difficulties, your money is protected up to this threshold.

If you're fortunate enough to have more than $250,000 to save, consider spreading it across different banks to stay within the guaranteed amount for each institution.

That all depends on your savings style and needs, but a term deposit might be worth it if you are looking for:

• A safe, cash only investment. A term deposit is free of the risks that come with investing strategies like share trading.
• An easy way to start saving. Low maintenance and safe, a term deposit is a great way for novice savers to start out.
• Somewhere to stash a lump sum of money you don’t need soon. Got a Christmas bonus or maybe an inheritance? If it’s not part of your day-to-day budget, a term deposit might be the perfect place to stash it away.
• A strategy to meet set future goals. Are you saving to buy a car in three months, or for a deposit on a home loan in two years? By putting your nest egg away in a term deposit, you’ll avoid the temptation of spending it before you reach your goal.
• A long term solution. Term deposit interest rates change all the time. If you’re looking for a long term solution that can ride the ups and downs of the market for years to come, a lengthier term deposit could be it.

The choice depends on your personal needs and saving style. Term deposits give you more interest rate certainty but it lacks flexibility as early withdrawals will incur a fee and usually 30 days notice. They're ideal if you have a solid budget and a separate emergency fund.

Savings accounts have variable interest rates, benefiting from rate hikes but also affected by cuts. They offer easier access to your money, which may be preferable if you need more flexibility.

So whichever account you decided will need to take into account your budget, need for emergency savings, and desire for accessibility. 

Find a term deposit

If all the advantages to having a term deposit have convinced you it’s the savings strategy for you, then here’s how to find the best offer:

First, head over to our term deposit comparison page to find the best offers from across the market.

Next, narrow it down with our term deposit search tool, which will show you results applicable to your deposit amount and desired term.